5.4.3 Rebates (discounts granted after original payment was made) – ‘money off schemes’ and ‘cash back schemes’

Under the EU VAT rules, in cases where discounts are granted after the supply takes place (i.e. rebates), the taxable amount shall be reduced accordingly.1 This provision was introduced to make sure VAT was only paid on the consideration actually received for the transaction.2 The EU VAT rules contain a provision that ensures that the VAT on this transaction that was deducted by the recipient of the goods or services receiving the discount or rebate is also adjusted.3 This way, the part of the ‘VAT overpayment’ refunded to the supplier balances out the ‘overdeducted VAT amount’ that has to be adjusted by the purchaser.

For a transaction between two fully taxable businesses, rebates have no net effect on the VAT position of those businesses.4 This is different for transactions between a business and a private consumer. In a simple diagram, this can be illustrated as follows (the arrows with numbers in the diagrams represent payments, arrows with symbols (e.g. ٭) represent supplies, boxes represent taxable persons and circles represent private individuals/non-taxable persons,5 and the applicable VAT rate is 20%):

In Diagram 1, Manufacturer (M) supplies goods to Wholesaler (W) for a taxable amount of 100, on which it charges 20% VAT. Therefore, W pays M a total amount of 120. The VAT element of this payment, 20, is remitted by M to the tax authorities. W can deduct this VAT amount. Subsequently, M grants W a rebate (VAT inclusive) of 12. This means that M will have only received a total (net) amount of 90 (100-10) for its supply to W. M has initially remitted a VAT amount of 20 to the tax authorities. M can now get back the VAT on the amount of the rebate: 2. This means that M will have paid VAT on the net amount of 90, being 18. W will have to pay back 2 of the 20 VAT it initially deducted. The net effect for the treasury is 0, as should be the case in respect of transactions between fully taxable businesses.

In Diagram 2, Retailer (R) supplies goods to customer (C, a private individual with no right to deduct VAT) for a taxable amount of 200, on which it charges 20% VAT. Therefore, C pays R a total amount of 240. The VAT element of this payment, 40, is remitted by R to the tax authorities. Subsequently, R grants C a rebate (VAT inclusive) of 24. This means that R will have only received a total net amount of 180 (200-20) for its supply to C. R has initially remitted a VAT amount of 40 to the tax authorities. R can now get back the VAT on the amount of the rebate: 4. This means that R will have paid VAT on the net amount of 180, being 36. The net effect for the treasury is a reduction of the VAT amount received for this transaction: a total VAT amount of 36 (20% VAT on 200-20) is collected for this transaction.